Pivot points are technical indicators that can prove helpful to investors, giving them one more tool for assessing the market. Trend, range and breakout traders can all harness pivot points points, using them to determine when to enter and exit positions.
By calculating these points, investors can gather several helpful pieces of information. Technical analysts can use pivot points to not only determine levels of support and resistance, but also to gauge whether a market is bearish or bullish. In addition, these points can be especially helpful for determining stop-loss prices and profit targets.
At their most basic level, pivot points are areas where a security's price trend might change. These technical indicators can help one obtain a better sense of how these financial instruments will behave in the short term, and investors frequently use pivot points for this specific purpose.
Calculating Pivot Points
To calculate pivot points, technical analysts harness the high, low and closing value of a security, and in some cases levels of support and resistance. These values can be from the last day, week or even month. The forex markets are open 24 hours a day, so calculations that involve a particular session will assume the session ends at 5 p.m. EST.
There are several methods for determining a pivot point, with the most basic one involving averaging the high, low and closing prices for the prior day. Another technique, called the five-point system, adds two support levels and two resistance levels to the aforementioned price levels.
Once a trader has identified the pivot point, he can then use this piece of information to calculate support and resistance levels. To determine the first levels of support and resistance, the trader can start with the pivot point and then measure the width between this point and either the high or low prices from the previous day.
To calculate the second level of support and resistance, the investor can utilise the full width between the prior session's high and low prices.
Using Pivot Points
Once traders have identified pivot points, as well as their corresponding levels of support and resistance, they can harness this information. There are many uses of these data points, with some being more straightforward than others.
One basic application is that if a currency is trading above a pivot point derived from the previous day's values, this situation helps show the bullish feelings of the global markets. In such a case, a forex trader looking to make use of trends might want to take a long position in the belief that he can capitalise on the sentiment of the market.
However, if a currency is trading below the prior session's pivot point, an investor can take this as evidence of bearish sentiment. In cases like these, a trader may want to take a short position on the currency.
Range traders can potentially use pivot points, as well as their corresponding levels of support and resistance, to find better times to enter and exit trades. For these investors, pivot points can serve as reversal points. In addition, support levels can provide a good place to enter a buy order. Once a currency nears one of these levels, a range trader might find it a good time to take a long position.
In contrast, resistance levels can help give investors a good place to sell. When a currency approaches such a level, this might indicate an opportunity to close out a position and take profits.
Investors interested in breakout trading can also make use of pivot points. More specifically, these traders, who study charts in an attempt to identify instances where a security will experience a significant price fluctuation in a short time frame, can use pivot points to gauge when breakouts are genuine.
If used effectively, pivot points can potentially be a valuable tool for traders. If investors take the time to learn about these points, they may find they have one more tool for evaluating the market and determining when to enter and exit positions.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…